By Steven K. Beckner

ST. LOUIS (MNI) – Research at the Federal Reserve Board confirms
Fed Chairman Ben Bernanke’s contention that quantitative easing has been
effective, a Fed Board staffer said Thursday.

Thomas King, an economist in the Fed Board’s Division of Monetary
Affairs, told a St. Louis Federal Reserve Bank conference on
quantitative easing that large scale asset purchases not only reduced
the yields of securities purchased but lowered the entire yield curve.

King’s paper, co-authored with fellow Fed economist Stefania
d’Amico, looks primarily at the effects of the Fed’s first $300 billion
program of Treasury security purchases.

They look at both the “flow effect” — the impact of each purchase
— and the “stock effect” — the cumulative effect of the amount of
securities held in the Fed portfolio.

“We find that the program resulted in a persistent downward shift
in the yield curve (its ‘stock effect’), amounting to between 20 to 30
basis points in intermediate-maturity zero-coupon yields,” King said.

“In addition, except at very long maturities, purchase operations
caused an average decline in yields in the sector purchased of 3.5 basis
points on the days when they occurred (the ‘flow effect’),” he
continued. “The coefficient patterns generally support a view of
segmentation or imperfect substitution within the Treasury market during
this time.”

King added that the Treasury large-scale asset purchase program
“met the Federal Reserve’s objectives of improving Treasury market
liquidity and contributing to a reduction in the cost of credit.”

“More broadly, our results provide support for preferred-habitat
and portfolio-balance theories of the term structure,” he said.

“Consistent with such theories, we find that:

* (1) “withdraws of Treasury supply decrease yields by an
economically meaningful amount;

* (2) “these decreases are generally biggest for the specific
securities being bought and for securities of similar maturities but
smaller for securities with much different maturities;

* (3) “particularly for stock effects, the discrepancies between
own purchases and substitute purchases are larger among less-liquid
securities (off-the-run bonds); and

* (4) “also among off-the-run bonds, the flow effects are
persistent, suggesting that they are not just due to short-run
rebalancing or microstructure-related distortions.

** Market News International **

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